Posted by Randall A Reinwasser on Wednesday, April 20, 2011
Under: Stocks

If you're one of the lucky employees who has access to a brokerage
account inside your 401k plan, you should consider using it. Besides
offering you a much broader array of investment choices, a brokerage
account allows you to take control of your financial future and grow
your portfolio, regardless of how badly US and international economies
might falter in the future.

1) More Mutual Fund Choices
- A typical 401k plan might have 20 investment options. At first
glance, this seems like a broad menu to choose from. However, when you
consider that there are over 20,000 mutual funds in existence, you'll
realize that the mutual funds in your company's 401k plan are most
likely not the best of the best. Using a brokerage account allows you
to pick and choose the funds with the best long-term track
record. Morningstar's Analyst Picks (subscription required) is an
excellent way to find the highest rated mutual funds in each asset
category.

2) Lower Expenses - All too often, small and medium
sized companies require the employees to pay for the administrative
cost of their 401k plan. This cost is recaptured by offering mutual
funds which have either a front-end load or high annual expense
ratios. If this sounds like your plan and you have a brokerage account
link, you can get around those high fees. Once you open a brokerage
account, you can choose no load mutual funds with low annual operating
expenses. If you don't think operating expenses are important, consider
this:
If a 40-year-old had $500,000 invested in mutual funds that
returned 8% per year but charged 1.3% in fees, those fees would reduce
the portfolio's value by $1.5 million over 30 years. If this same
investor reduced the fees to 1%, the portfolio's loss due to expenses
would be reduced to $1.2 million. That's a savings of $300,000 just by
investing in lower cost funds!

3) Greater Investment Flexibility - Most investment
professionals have been taught (and teach) that you can build a
diversified portfolio within a 401k plan. The following quote by Joshua
Dietch, of Cerullia Associates, is a good summary of the industry's
group think on this subject: "If the average 401(k) plan has 12 options,
within that, you can probably build a pretty diversified portfolio." I
find this to be not only completely false but also dangerous. In the
recent economic crisis, stocks and bonds ended up with a correlation of
almost 1. That's the exact opposite of diversification.

Using a brokerage account allows you to build a properly diversified
portfolio by adding asset classes like precious metals, foreign
currencies, agricultural commodities, and inflation adjusted bonds. My
favorite diversified portfolio is Harry Browne's Permanent Portfolio.
An explanation of the Permanent Portfolio can be found in Harry's short
book, Fail-Safe Investing. Interested readers should be able to find a
copy thru Amazon.

4) Gold, Gold, Gold (and some Silver) - If you're
like me, you're at least worried about the possibility of
hyperinflation, deflation or a crash of the US dollar. You can
have the best stock and bond mutual funds in the world and it won't help
protect your nest egg in any of those scenarios. What can help? Gold
and silver. These two assets have been used as money for 5,000 years and
as recently as 1971, gold still backed the US dollar. I'll boldly
predict that gold and/or silver will be used as money again, within the
next 20 years. The point is, if you want to truly protect your nest egg,
it's imperative that at least 5-10% of your portfolio is in precious
metals. Using the brokerage account in your 401k, you can buy gold and silver
through a variety of gold and silver Exchange Traded Funds (ETF). A one-stop fund I like is the Central Fund of Canada, ticker symbol
CEF. Central Fund's assets are about a 50/50 split of gold and silver.

5)Speculation Opportunities - Investing can be a
lot more enjoyable (and profitable) with a bit of speculation added
in. Know of a small bio-technology company with a compelling stem cell
drug in the pipeline? Why not buy a few shares? With a brokerage account
you can buy pretty much anything you want.

Not all employees with brokerage accounts should use them. If you're
a novice investor or don't have the time or inclination to follow the
ups and downs of the economy and markets, you'll probably be better off
choosing from your 401k's investment options. However, if you have the
experience and insight, utilizing your 401k brokerage account can be a
very productive and rewarding decision.

Full Disclosure: Randall Reinwasser and Solitude Canyon Investment Advisor clients have long positions in gold and silver, including CEF.